Since 1971, in the Nixonian monetary era, the American government has enjoyed a power derived from the pure fiat paper money that its central bank can print in unlimited quantities to finance the government’s deficits. Simply put, politicians naturally like to keep passing out money to stay in office. It’s convenient, politicians reckon, to have a compliant central bank to buy government bonds with printed money — especially if the Congress is spending more than taxes bring in.
Of course, this scheme depreciates the currency, taking away the people’s purchasing power and the value of their savings and wages. As Friedrich Hayek observed in his essay “Choice in Currency,” “Practically all governments of history have used their exclusive power to issue money in order to defraud and plunder the people.”
Hayek argued that the essential problem is that the government’s central bank has an “exclusive power” to print money, or in other words, a monopoly on money, so it can impose its depreciating currency on the people. He suggested that since there is no hope of reforming the central bank, instead we should focus on taking away its monopoly. Thus:
“Let us deprive governments [and] their monetary authorities of all power to protect their money against competition.” Then “if people were free to refuse any money they distrusted and to prefer money in which they had confidence, [there] could be no stronger inducement to governments to ensure the stability of their money.”
In other words, let choice in currency and competition among currencies discipline the government and its central bank. If they produce an inferior money, that money would lose out to the better one supplied by someone else. This was an innovative application of classic market logic to the problem of money, one notably consistent with a free society.
Hayek concluded, “I hope it will not be too long before complete freedom to deal in any money one likes will be regarded as the essential mark of a free country.” A recent introduction to Hayek’s thought observes that this essay “is enormously popular among advocates of cryptocurrencies.”
